Process tomato prices to reflect '05 cost gains

The 2005 season for processed tomato growers was a year “best forgotten.” That's how California Tomato Growers Association (CTGA) President Ross Siragusa summed it up at the association's annual meeting in Modesto recently.

However, it is a season growers are not letting packers forget as they negotiate 2006 contract prices.

Persistent weather problems and a parade of cost increases due primarily to energy and labor shortages translated into significant yield reductions and higher production costs for the state's growers.

The 2005 crop weighed in at 9.6 million tons which was 7 percent below industry expectations as well as the 10-year average. The average yield per acre in 2005 was only 36.2 tons per acre which represented a disappointing 12.8 percent drop from the 2004 average.

“On average, growers received $1,760 per acre in revenue and spent $1,900-$2,100 per acre in production costs,” Siragusa said. “Although it was a disappointing year to say the least, there is a silver lining to the cloud.”

That silver lining is an ending inventory of just 2.9 million tons. That compares to an average ending inventory of approximately four million tons in years 2000 through 2004. “That's the lowest carry-out inventory since 1998,” Siragusa said.

That translates into a mixed bag of news for processed tomato growers as they head into the 2006 season and beyond. In the short-term, contract prices are probably going to be significantly higher than the $50 level they've been hovering around since 2000.

“Pricing for 2006 is up sharply which is a reflection of higher costs and increased recognition of the high risks associated with growing tomatoes,” Siragusa said. He said 2006 pricing is not settled. However, he added that the southern growing region from Firebaugh south is currently contracting at $58 per ton whereas the Northern region is $59 to $60 per ton.

“In spite of the anticipated higher contract prices, we do not anticipate a widespread increase in acreage,” Siragusa said.

Over the long-term, the news for the domestic industry is uncertain at best. Global competition and rising domestic production costs are continuing to squeeze margins in every direction from the field to the processing plant. “It's a simple economic principle,” said Chris Rufer, president of Morning Star Company. “We all have to make a profit or we're out of business.”

In a political sense, it is not only a grower versus buyer struggle, it is a grower versus grower struggle and it is taking place within the state as well as globally. California's northern growers are adamant this year about securing higher contract prices than their southern counterparts due to losses in 2003 and 2005 and their concern over being unable to produce consistent high yielding crops, according to Siragusa.

While economically understandable, it's a situation that's creating confusion in the negotiation process and essentially pitting the South against the North within the state. Siragusa addressed the need for more communication statewide.

Tenuous future

“The northern growers worked to become unified in their stance by discussing costs, yield histories and return objectives,” he said. “There is a strong desire to take this dialogue to other regions to address not only costs, but benchmark best management practices. We need to work toward the goal of broader communication so that we can come up with a more unified pricing strategy across the state as well as work toward improving production efficiencies.”

From a global standpoint, the struggle for survival of California's processed tomato industry is tenuous over the next five to 10 years. It was a common thread echoed by all of the processors/packers who spoke at the annual meeting.

“California's processed tomato production is still considered the benchmark for the industry when it comes to quality,” said Reuben Peterson with H.J. Heinz Co. Factors such as crop quality and consistency of supply are reasons why Heinz keeps coming back to California growers for product, he noted. A long-term outlook is favored over the ups and downs of specific years. However, he also pointed out that other countries such as Brazil and Canada are making significant progress in their growing operations in many areas including competitive yields.

Transportation costs are also a key consideration for Heinz when selecting its supply sources since the crop is often shipped long distances for processing, according to Peterson. Skyrocketing fuel costs, especially in 2005, have become a major consideration for company executives when making commitments for contracts, he said. “We have to consider where the product is being produced, where we're going to ship it, and how much that is going to cost.”

The future of California's processing tomato industry may be largely dependent on how much more efficiency growers can eke out of their operations and counteract rising production costs. “I think we're going to have to continue to improve the agronomic science and take advantage of technologies,” said Dave Withycombe Sr. vice president, Western Region, Del Monte Foods.

All efficiencies

Everything from improved, more efficient irrigation systems to global positioning system technology should be utilized as much as possible to keep ahead of global competition, he said. Environmental stewardship was another common theme in the presenters' messages.

“We must be proactive and lead the environmental discussion,” Siragusa said. “The environmentalists will no doubt pursue their agenda on several fronts. We need to take the lead and manage our dialogue instead of letting the environmentalists manage it for us.”

From “Protected Harvest”, an eco-labeling strategy touting sustainable agriculture, to a myriad of water quality and use issues, Siragusa advocated an aggressive, rather than passive, approach. He cited the University of California's Sustainable Tomato Workbook as one of the first steps growers should take to become proactive in the environmental debate. “The industry needs to defend its activities through facts which require measurement and recordkeeping,” he said. “If we don't do it ourselves, someone else is going to do it for us.”

Product promotion, new product development and updated marketing strategies were also placed on the priority list by each speaker. Withycombe outlined the need for fresh new packaging ideas that appeal to modern day consumers on the go and the need to work with retailers to reinvent the grocery store shelf. He pointed to Del Monte's efforts in developing new products in packaging other than steel cans. “Today's consumers want to see what they're buying,” he said. “They want to look through the glass and see the tomato rather than looking at a picture of it on a steel can.”

The importance of the nutritional story was also driven home by each speaker. “We have a compelling nutritional story to tell, but we need a focused industry strategy to tell it,” Siragusa said.

He outlined four steps CTGA will take during 2006 to move the industry in that direction. They include gathering input from the industry as well as consumers, identifying steps required to communicate the desired message, exploring options for communicating that message and defining costs and organization requirements.

The nutritional message and potential upside of promotional efforts in that arena were a refreshingly optimistic theme among all conference speakers in light of the sobering economic realities that currently exist in the industry. The health benefits of lycopene were repeatedly pointed to as a key message that should be better promoted to consumers.

“You have one of the few food products that actually increases in nutritional value when it's processed,” said Rodger Wasson, Founder of Wasson & Associates. “That is a very powerful message and one that very few others can claim.”

Wasson also put a different spin on the forces of global competition and how it could eventually pertain to the domestic processing tomato industry. “We often view third world countries as competitors,” he said. “In actuality, they should be viewed as consumers. Third world economies are growing at a phenomenal rate. As their standard of living increases, so does their spending and they begin by spending it on better foods.”

While the potential for growth in the U.S. market is rather flat, Wasson said the potential for export to developing countries is enormous. That potential is quickly expanding due to a rapidly developing infrastructure. “You have to have a shelf to put it on before you can sell it,” he said.

Those shelves are arriving rapidly in many countries around the world, according to Wasson. Whether or not California's processed tomato industry can cling to life long enough to take full advantage of the export opportunities of the future remains to be seen. A unified voice in tackling today's issues will likely be a key factor.

Membership in CTGA increased from 32 percent to 45 percent since the 2005 crop year, according to Siragusa. “Our financial results for the association were the best since 1999,” he said. “Belt tightening and downsizing have helped us accomplish that. We've also made an effort to increase direct communication with growers to better understand their needs. As we move forward into 2006, I believe we have an opportunity to grow further.”